Some Rules to Keep in Mind

So as to be able to carry out naked put selling in a brokerage account, it will be necessary to have a margin kind of account, in addition to being approved by the brokerage to the options trading level that will permit selling of puts. There are certain firms that do not allow first time traders to sell put options immediately because they are under the idea that it is simply too risky to be doing. The risk is not limited to the state where the stock can go down to zero after having been assigned shares. There is actually not any different in the risk of a put selling method and purchasing shares of stock straight up. What is the risk that exits when one purchases shares of stock? The risk involved is that the stock does have a chance of falling down to nothing; however brokerage firms do not place restrictions on people that are interested in purchasing stock. This means that anybody who wants to can open a stock trading if they are interested in doing so and lose all their money on a long stock position. Nobody prevents or interferes with investors doing so. The same thing occurs in the case of trading covered calls. The risk is too not limited on the down side to where the stock could go down to zero, however the brokerages believe that covered call trading is one of the most conservative methods or strategies that exist. So why would put option selling then be thought of as being riskier than purchasing stock? This is something that is certainly not easy to understand. Keep in mind also that when a person is assigned on a put option, it will be necessary for him or her to have the sufficient amount of money in their account so as to be able to cover the expense of purchasing one hundred shares of stock, which is an option contract.

Requirements of margin
During the time the short put position is open, and at the time previous to any point of assignment, the broker will want you to maintain a specific quantity of money in your account. This is what is known as a margin requirement or money. This money need to be kept at hand in an account always while the naked short put option position is held. This money is held as good faith money and is to be utilized to cover yourself in case the position begins to turn against you. There is a specific formula to obtain a margin requirement and there is a way in which this can even be calculated, it works like this: twenty percent of the underlying price plus the credit that has been obtained minus the quantity that the strike is out of the money OTM times one hundred. This is the minimum amount one needs to keep at all times when the position is open. If it is assigned, the full amount will need to be paid to purchase the shares. Obviously it is a lot easier to only pay a smaller amount than to have to pay out the total amount straight up for the same shares.